Establishing Effective Fiduciary Relationships

A frequently contentious area in the elder law arena is the establishment of effective fiduciary relationships. Such relationships are frequently established through powers of attorney, living trusts and other inter vivos documents. Problems frequently arise when writings, establishing these relationships, are poorly drafted and when fiduciaries are not properly selected. Such problems are further compounded when no legal direction is either sought or given after the establishment of such relationships.

Increasingly, legal challenges are asserted against a fiduciary for breach of fiduciary duty. At times, such challenges accurately attack a fiduciary who may have intentionally misappropriated the funds of the individual to whom he or she owes a duty of care and trust. However, many causes of action are raised over simple areas such as poor communication with interested parties and shoddy record keeping.

In this day and age, an elder law practitioner must recognize that establishing effective fiduciary relationships does not start and end with the drafting of pedestrian legal documents. An attorney must understand that his or her obligation, in this field of law, must encompass the following areas:

(a) drafting effective documents including powers of attorney and living trusts, understanding their difference as well as their merits and shortcomings;
(b) assisting in the intelligent and complete selection of fiduciaries and contingent fiduciaries;
(c) providing on-going representation to either the principal and the fiduciary, ensuring that the fiduciary is able to do their job, yet remaining cautious of any potential conflicts of interest;
(d) apprising the fiduciary of planning opportunities such as tax and Medicaid planning; and
(e) representing a fiduciary in litigation over negligence and abuse.

Types of Fiduciary Relationships
The term, “fiduciary”, connotes a relationship established and based on trust. Certainly, there are a host of fiduciary relationships which can be established, such as guardians for minor children, as well as a host of relationships with trust departments at banks and brokerage houses. In the estate planning and elder law arena, the primary list of fiduciaries includes:

(1) Executor under a will;
(2) Administrator of an intestate estate or C.T.A. under a will;
(3) Trustee under a will;
(4) Trustee under a revocable living trust;
(5) Trustee under a sophisticated estate planning trust such as a Grantor Retained Annuity Trust, Grantor Retained Annuity Trust, Qualified Personal Residence In Trust, Irrevocable Life Insurance Trust, Charitable Remainder Trust or Charitable Lead Trust;
(6) Trustee under a sophisticated elder law trust such as a Miller Trust, Income Only Trust, Third Party Special Needs Trust, Self-Settled Special Needs Trust, Pooled Trust or Spousal Annuity Trust;
(7) Conservator of an Individual’s Person and/or Property;
(8) Guardian of an Individual’s Person and/or Property;
(9) Agent, either as a proxy or health care representative pursuant to an advanced directive; and
(10) Agent under a power of attorney, most notably a general durable power of attorney.

Establishment of Fiduciary Relationships
Which Documents to Utilize

When representing any competent client, an attorney should prepare at least three estate planning documents:
(1) Will – to dispose of the client’s assets after his or her death;
(2) Advance Directive – to provide guidance to third parties as to medical decisions which may need to be made in the event of the client’s incapacity, especially in regards to the issue of withdrawal or withholding of life-sustaining treatment; and
(3) General Durable Power of Attorney – to provide the ability for a third party to manage the financial (and, if properly drafted, personal) affairs of the client in the event of disability.

In this day and age, it is arguably malpractice not to suggest that a client have each of these three documents as a bare bones estate plan. In an era where approximately 40 to 50% of our aging population will require some level of long term care, the effectiveness of the best drafted will or trust can greatly diminish if lifetime fiduciary planning is not undertaken.

Certainly, other documents, such as those mentioned in the preceding section, will need to be drafted to respond to the understandable needs of clients to minimize or avoid exposure to probate, death taxes and long term care costs. In order to identify and respond to these needs, it is imperative for an elder law practitioner to acquire accurate and complete information from his or her clients at the outset of the attorney-client engagement. Such information must include the client or clients’ personal and medical background as well as a listing of assets, income and significant liabilities.

Drafting Documents
One of the greatest shortcomings of attorneys, when representing estate planning or elder law clients, is the over reliance on simple form documents. Attorneys must recognize that our clients have spent a lifetime earning their estate. As such, our document preparation on their behalf must honor that commitment and exceed sloppy forms.

Without question, there is a value to forms. Attorneys should not have to reinvent the wheel each time he or she meets with a new client. However, forms should be used as a model and only good forms should be used in any system.

Arguably, the most important document for many of our clients is a general durable power of attorney. This document authorizes one or more individuals to make personal and financial decisions on behalf of our client. Unfortunately, many attorneys use one or two page forms which are generic in nature. Forms need to be customized and expanded in order to meet the needs of our client base. It must be impressed that the power of attorney asks a host of financial, medical and business institutions to rely on the representations and actions of a third party who is purportedly acting in the best interests and on behalf of our client.

As our society increasingly sees more government regulation and litigation, many of these institutions have becoming cautious in accepting powers of attorney and more frequently insist on detailed language that corresponds to the action the agent therein wishes to take on behalf of the client. Moreover, the ability to plan for a client who has become disabled may be limited if a power of attorney is not thorough. The Internal Revenue Service has consistently taken the position that it will not recognize gifts given through a power of attorney absent express language within the power of attorney authorizing same or a state statute which allows an inference on behalf of gifting. Without express language allowing an agent to participate in gift giving, many states take the position that gift giving, to the extent it includes an agent, is self-dealing and voidable. This position is certainly ironic in light of the fact that the agent typically appointed by a client is a spouse, adult child or other potential estate heir.

In light of the foregoing, it is clear that powers of attorney should be carefully drafted. They should contain language which covers the following areas:

This section should discuss whether the power of attorney is effective immediately or springing.

2.1. Power to Sell Specific Real Estate
2.2. Power to Sell
2.3. Disposal of Proceeds of Sale
2.4. Use of Credit Cards
2.5. Power to Invest
2.6. Securities and Brokerage Accounts
1.8. Power to Execute Further Powers of Attorney
1.9. Power to Exercise Rights in Governmental Securities
1.10. Power to Demand and Receive
2.11. Compromises and Discharges
2.12. Exercise Elective Share Rights
1.13. Power with Respect to Employment Benefits
1.14. Power with Respect to Banks
1.15. Power with Respect to Legal and Other Actions
1.16. Power to Borrow Money
1.17. Powers with Respect to Trusts
1.18. Power to Renounce and Resign from Fiduciary Positions
1.19. Power to Disclaim, Renounce, Release or Abandon Property Interests
1.20. Power with Respect to Insurance
1.21. Power with Respect to Taxes
1.22. Power to Manage Real Property
1.23. Mortgages and Deeds of Trust
2.24. Power to Make Loans
2.25. Power to Make Gifts
2.26. Catastrophic Illness Power
2.27. Managing Agency Accounts
1.28. Employ Consultants
1.29. Power to Operate Businesses
2.30. Partnership
2.31. Power to Provide Support
2.32. Pets
2.33. Deal with Environmental Hazzards
2.34. Closely Held Business Interests

3.1. Maintain Standard of Living
3.2. Protect or Dispose of Property
3.3. Power to Make Advance Funeral Arrangements
3.4. Power to Change Domicile

4.1. Resort to Courts
4.2. Hire and Fire
4.3. Sign Documents, Etc.
4.4. Power to do Miscellaneous Acts
4.5. Waiver of Confidentiality
4.6. Delegation of Authority
4.7. Appointment of Successor

5.1. Third Party Liability for Revocation and Amendments
5.2. No Liability to Third Parties for Reliance on Agent
5.3. Authorization to Release Information to Agent

This section should state that the power of attorney will not be affected by the principal’s incapacity.

7.1. Compensation of Agent
7.2. Nomination of Agent as Conservator and Guardian for Principal
7.3. Alternate Agents as Alternative Conservator/Guardian
7.4. Waiver of Certain Fiduciary Responsibilities
7.5. Agent to Continue if Guardian/Conservator Appointed
7.6. Severability
7.7. Governing Law and Applicability to Foreign Jurisdiction
7.8. Definitions
7.9. Revocation, Removal, Amendment and Resignation
7.10. Counterpart Originals
7.11. Photocopies
7.12. Separation or Divorce
7.13. Temporary Unavailability of Agent
7.14. Appointment of Ancillary Agent
7.15. Agent’s Resignation
7.16. Agent’s Death, Incapacity or Reisgnation
7.17. Accounting

Selection of a Fiduciary
Selecting a fiduciary is an extremely important task. Unfortunately, many people make poor choices in fiduciary selection. Although the management of an individual’s personal, medical and financial care is one that requires complete trust and competence from a potential agent, people make selections on the most inane reasons. Unfortunately, many attorneys merely ask the name and address of a proposed agent rather than inquiring into the individual’s capabilities. For example, in a living will, the health care proxy or health care power of attorney ought to be someone that has the best medical background and/or can make a medical decision to remove life-sustaining treatment. Moreover, an individual that is entrusted to handle finances through a power of attorney, will or trust document must have some level of financial common sense and high degree of integrity.

People, however, frequently make appointments to documents, when appointing children, on the following grounds:
A. Age (e.g., “He or she is the oldest.”)
B. Gender (e.g., “He is the man of the house.”)
C. Proximity (e.g., “She lives closest to me.”)
D. Feelings (e.g., “I don’t want to hurt her feelings.”)

Certainly, if one were to open a financial enterprise, they would never hire anyone based on these qualifications. When someone selects a fiduciary, they need to treat it as if they were hiring a chief financial officer of their company. Obviously, legal, financial and accounting backgrounds are not necessary. However, it is imperative for the client to know that they need to appoint someone based on “high integrity and common sense.”

Post-Document Representation
After the establishment of a fiduciary relationship, many attorneys conclude their representation of the client. However, it is just as important to counsel a fiduciary on their obligations to their principal as it is to set up the relationship. Typically fiduciaries are family members who are likely not acquainted with the legal standards to which they are subject.

It is both an opportunity and an obligation to counsel clients on your availability to assist the fiduciaries they appoint. Obviously, issues of potential conflict of interest must be disclosed and resolved. However, most clients want their fiduciaries to utilize the services of the attorney who drafted their estate planning or elder law documents. Such services are typically limited to representing executors and trustees in post-mortem matters. Such limitation avoids and wastes the opportunity for lifetime representation.

Lifetime representation is extremely important for the client and beneficial to the attorney who provides ongoing representation. When a client becomes disabled, either his agent under his power of attorney or trustee under his living trust should be counseled about the steps they must take in managing and administering assets. This level of service is helpful in two areas: (1) the client needs to be protected during his or her lifetime, and (2) the fiduciary needs protection after the client dies.

The client obviously needs protection. If the fiduciary mismanages or wastes the assets of his or her principal, the principal’s quality of life will be impaired. It is uncanny, though, to see how many people merely “wing it” when it comes to handling assets as a fiduciary. It must be clearly counseled that a fiduciary must handle such assets with care. Although the fiduciary may wish to invest his or her own finances without professional help, they need to be apprised of the common law standards as to asset management as well as the Prudent Investor Act. Especially in moderate to larger estates, communication with a financial professional is essential.

The fiduciary needs protection as well. After the death of a client (and sometimes even during lifetime), the actions of a fiduciary may be questioned by the heirs of the client’s estate. A fiduciary needs to be able to promptly and effectively address such questions when they arise. Unfortunately, many fiduciaries, if not counseled, keep extremely poor records.

Countless attorneys can recall countless instances where fiduciaries fail to keep receipts, bank statements and other financial records. Such shortcomings are often compounded by the fiduciary making checks payable to themselves or to “cash” to pay for expenses of the client. When these shortcomings occur, delays occur in providing answers to family members and other heirs. Such delays frequently arouse suspicions of wrongdoing which, in turn, can be translated into actions to remove or surcharge the fiduciary. The cost of such litigation has an extremely high financial and personal cost. Since most of these actions involve fighting among siblings, the tensions are even more exacerbated.

Attorneys must counsel the fiduciaries to keep and maintain any and all financial records no matter how trivial they may seem to be. They must also counsel the fiduciaries to avoid or minimize payments to self and to “cash”. If such payments are truly necessary, they must be substantiated by receipts.

Bookkeeping should be recommended as on ongoing obligation. If questions are asked or if litigation arises, detailed entries from fiduciaries can be translated into effective communications with heirs as well as proper accountings.

An effective advocate should consider providing the following services to his or her clients, and their fiduciaries:
(1) Ongoing tax preparation;
(2) Periodic meetings to review trust or other fiduciary decisions;
(3) Bookkeeping; and
(4)Bill Payment.

Such services may sound risky or outside the practice of law. However, they can ensure that clients are protected. Although an attorney will typically be utilized for support for a fiduciary, an attorney can also serve as a fiduciary as well.

One of the more important tasks an attorney should do is remind his or her clients, as well as their fiduciaries to contact the attorney for help during lifetime crises as well as after death. The assistance of an attorney for Medicaid and tax planning during lifetime is just as important, if not more important, than assisting with the administration of a client’s estate.

Representation in Litigation
As indicated previously, representation of a fiduciary in litigation over his or her performance is sometimes necessary. If called upon to undertake such representation, an attorney must ensure that no conflicts exist with the individual who established the fiduciary relationship or any family member or other interested party.

The most effective response is a quick response. If clients have kept records in the manner set forth above, quick discovery can nip family complaints or litigation in the bud. If such records are not available, the attorney should make a sober decision as to whether or not to accept representation. If litigation commences and an attorney discovers wrongdoing, it can be very difficult to either withdraw from representation or make necessary disclosures to interested parties. If an attorney decides to undertake the representation, immediate steps should be taken to obtain all necessary documents, either through subpoenas or other forms of written requests, to provide an accurate accounting as promptly as possible. Many financial institutions are slow to respond to requests for information so requests need to be made at the outset of representation. As indicated previously, delay in providing disclosure can frequently translate into an impression that the fiduciary has committed wrongdoing.

As set forth in this article, any elder law or estate planning attorney must realize that effective establishment of fiduciary relationships involve careful document preparation and selection of potential agents. Moreover, representation should extend beyond the creation of legal documents. If steps, such as the foregoing are followed, the interests of clients, fiduciaries and their attorneys will be well served.


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